Property & Casualty Insurers Face Challenging 2008
While the property and casualty insurance industry saw strong earnings in 2007 and finished the year with exceptionally healthy balance sheets, this year is likely to prove more difficult, Ernst & Young says in its Outlook for 2008. The first half of 2007 saw net written premium growth of just 0.1%. Considering, though, that 2006 had been the most profitable year for the industry since 1988, this low level of growth was not surprising, E&Y says.
The first half of 2007 saw profits rise an impressive 5.5%, but the annual compound growth rate in premiums is forecast at just 2.6% over the next five years.
One key forecast of the Outlook: “We expect margin compression to accelerate in 2008. While favorable underlying loss trends have enabled the cost of manufacturing to remain steady, core pricing has continued to erode.”
This environment combines with the falling value of the dollar to make a significant acceleration in industry consolidation likely, E&Y says. Indeed, many European firms are already looking to the US as a potential growth area.
E&Y notes that the effort required to implement new International Financial Reporting Standards and new proposals from the Federal Accounting Standards Board is likely to be enormous.
As we look ahead to the possibility of a new fair value type accounting standard, both in Europe and the US, the message is clear: a major, fundamental change in financial reporting for insurers is now on the horizon.
European firms have already been moving to deal with these changes. “… [R]ecent events should be a wake-up call to US insurers that they need to begin preparing for these changes.”
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